Mortgage tips for renewals and first-time buyers

I had a request from a reader recently to do a post on mortgage renewals, which took me back in time. When I was a teenager, I set a goal to be “mortgage-free by age 33”. Why 33? Because it rhymed, so it stuck in my head. I am fully aware of how bizarre it was for me to be thinking about such things at that time. However, being weird worked. My husband & I reached my goal a few years ahead of schedule, and have never looked back. Here are 5 tips that will help you save money on your mortgage and pay it off faster.

Tip #1 – Never pay the posted rate

Paying the posted rate on a mortgage is like paying the MSRP for a car. Only people who don’t know better actually fork over the full amount. Why is the bank willing to negotiate on this point when they refuse to budge on the monthly fee they charge you for your bank account? Because on a $200,000 mortgage (low by today’s standards), they stand to make almost $50,000 in interest from you over 5 years if you lock in with them at a rate of 5.24% (the rate on Royal Bank’s web site at the time of writing). How many hours do you need to work to make $50,000 after taxes? If they lower your rate by ½ a percentage point to 4.74%, your interest costs (and their revenue) would go down by about $5,000 over the five-years, but they would rather make $45,000 themselves than send you to a competitor. So, negotiate, negotiate, negotiate!

Tip #2 – Consider using a mortgage broker

If you’re not comfortable negotiating the terms of your mortgage or renewal yourself, consider using a mortgage broker. A broker is usually paid a commission by the lender, so it doesn’t cost you anything to have one. The broker will shop around for you, and may be able to secure a better rate than you could on your own. That being said, my husband and I never used a broker because I was confident in the rate that we had negotiated. The lender we were dealing with had also given me a fantastic rate on an interest-only line of credit a few years before for a business buy-in. I wanted to keep giving business to the place that had helped me buy mine.

Tip #3 – Pay bi-weekly or weekly instead of monthly

This advice is fairly widespread, but bears repeating. If you use an accelerated bi-weekly or weekly payment schedule, you’ll pay off your mortgage several years sooner. Think about that – a few years of mortgage payments is a big deal! In my experience, most banks will bring the bi-weekly payment option to your attention. However, you want to confirm that they are using an accelerated bi-weekly/weekly payment schedule. The accelerated schedule means that they take your monthly mortgage payment, split it in half, and that’s the amount you pay every two weeks. Using this method, you end up making an extra payment each year, and that’s what gives you the boost to get it paid off early. If the bank calculates a bi-weekly payment using a regular amortization schedule, then you’ll save a bit of interest because you’re paying a bit earlier, but not nearly as much as under the accelerated schedule.

Tip #4 – Look at the other terms, not just the rate

If the mortgage is open, you can make extra payments on it at any time. If it’s closed, then you can only pay your regular payments unless the bank offers some extras. For example, some banks will let you use a “double-up” option, which will allow you to pay double mortgage payments – either all the time or only a few times a year. Others have a 10% allowance, which will let you pay an extra 10% on your mortgage on a specific date – usually the anniversary date. Each bank has their own extra payment “perks”, so make sure you know what they are. You may wonder why the ability to make extra payments matters when you’re barely able to make the minimum, but you just never know. If you get a raise and decide to put an extra $100 per month towards your mortgage payment, you could save yourself over 3 ½ years of mortgage payments on a $200,000 mortgage. Even a little bit extra can make a huge difference. So, if you can, pay extra early on.

Tip #5 – Consider the impact of variable vs. fixed rate

A fixed rate mortgage has a rate that does not change over the term of the mortgage. A variable rate mortgage has a rate that varies with the prime lending rate. Usually, the payments stay the same over the term of the mortgage, but the amount of the payment being applied to interest vs. principal will vary. If the rate goes up, more of your payment will go to interest and less to principal. If the rate goes down, more goes to principal and less to interest.

Which should you choose? It really depends on the rate difference – both now and in the future (which of course cannot be predicted). When we had our mortgage, variable was the clear winner in most cases. With the price wars happening with the banks now, that may not be true anymore. You’ll need to do some number crunching and decide which scenario would be best for your situation. Regardless of what you choose, may you negotiate a great rate and pay it off early!